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The Blame Asia Meme

There seems to be a blame game making the rounds in policy circles these days in which Asia is at fault for the credit crisis and economic downturn. The meme goes like this: “Everything was fine until the Asians started manipulating their currencies and creating excess savings to export to the West. This mercantalist policy of low domestic demand, high savings, and an export-oriented economy set up huge macro imbalances that created the debt bubble and recession we see today. Asians need to save less and buy more — and stop manipulating their currency.”

Do you buy this line of argument? I don’t. But judging from recent statements by policy makers in the U.S. and the U.K., there are any that do. Witness this article from the Times of London last week, which was reporting on quantitative easing aka printing money. The U.K. has resorted to printing money as the only way out of an economic pickle. But not without some measure of recrimination. Note the blame given to Asia, which I have highlighted in bold:

Mr King emphasised the need for international cooperation to fight a global downturn. Limiting banks’ cutbacks on lending meant cross-border action was essential. “Almost every aspect of the present crisis has an international dimension.”

He blamed the crisis on a binge of lax lending by banks, and on a wall of cheap money from Asia as a result of “global imbalances”. Urgent action was needed to tackle these problems and prevent future turmoil, including new weapons for central banks and governments to prevent excessive future build-ups of debt, were needed. Governments of big economies also needed to work together to overhaul the global monetary system.

I flagged this article when I saw it last week, but my concern about the Blame Asia Meme has only increased with time. The focus here, of course, is China. Tim Geithner, the new U.S. Treasury Secretary, has said, "Treasury has to be and Treasury will be a source of bold initiative." What does that mean? Judging from Geithner’s other statements, it might mean protectionism. The video below sums up the protectionist sentiment both in Europe and in the United States.

The most pointed exchange has been as a result of Tim Geithner’s comments during his confirmation hearings when he accused china of "manipulating" its currency. Here’s what Willem Buiter says about all of this:

Timothy Geithner, the nominee for US Treasury Secretary, has risked damaging the global economy even before his confirmation by the full Senate. In a written answer to questions from US senators, Geithner said: “President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency”. In the US, the words “currency manipulation” are fighting words. If the US administration were to formally name China as a currency manipulator, a range of trade sanctions could be imposed by the US government.

The threat to world trade comes from the Omnibus Trade and Competitiveness Act of 1988. The section dealing with the exchange rate, bilateral current account balances and the overall current account balance is a monument to economic illiteracy.

Under the Omnibus Trade and Competitiveness Act of 1988, “The Secretary of the Treasury shall analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”

“If the Secretary considers that such manipulation is occurring with respect to countries that (1) have material global current account surpluses; and (2) have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage.”

I have mentioned in the past that Barack Obama does not have a consistent record on promoting free trade and many are worried, including Free Trade guru Jagdish Bhagwati, that we are about to see protectionism hit with full force. So, while the White House backpedaled from the protectionist sentiment, Geithner’s comments cannot be taken lightly.

This concept that Asia is to blame for the downturn and the massive losses at European and American banks must be rebutted before it gathers steam and creates a trade row that nobody wants.

Update 11 Mar 2009: The most recent chapter in the Blame Asia meme was written by Sir Alan Greenspan, who had a Wall Street Journal article out today defending his tenure at the Federal Reserve. The overall point was that the Federal Reserve was not responsible for the low interest rates which stoked the housing bubble. Rather, it was excess savings from Asia. Here is the important passage below.

The Federal Reserve became acutely aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004. Moreover, the data show that home mortgage rates had become gradually decoupled from monetary policy even earlier — in the wake of the emergence, beginning around the turn of this century, of a well arbitraged global market for long-term debt instruments.

U.S. mortgage rates’ linkage to short-term U.S. rates had been close for decades. Between 1971 and 2002, the fed-funds rate and the mortgage rate moved in lockstep. The correlation between them was a tight 0.85. Between 2002 and 2005, however, the correlation diminished to insignificance.

As I noted on this page in December 2007, the presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005.

So, there you have it – Asia was responsible for the bubble, not the West. And the blame game continues. See below for my original January article – Alan Greenspan is not alone here.

Sources

Mervyn King paves way to start Bank print presses – Times Online

Obama Deems China ‘Manipulating’ Yuan, Geithner Says – Bloomberg.com

When all else fails, blame China – Willem Buiter’s Mavercon

China comments not a "determination": White House – Reuters

Währungsstreit: IWF-Chef fordert Kurswechsel von Peking – Financial Times Deutschland

Broader point about Geithner, Obama, China, and "manipulation" – James Fallows, Atlantic

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

8 Comments

  1. mL says:

    China is a scapegoat in this case.

    China is buying T-bonds, a way to lend money to the U.S. government.

    What happens if Chinese lends money to the U.S. government in Yuan, and insist the US pays back in Chinese Yuan not U.S. dollars? Will the U.S. government insist Yuan to be appreciated? Probably not.

    mL

  2. Sobers says:

    Of course its a crock of an idea. Its just a way of hiding the fact that the West decided that it was above the dirty, hard work of digging stuff out of the ground, refining, smelting, manufacturing et al. It preferred to push pieces of paper around and sit in air conditioned offices, thinking that such activity created wealth. It doesn’t. The wealth created by the Eastern nations is built on the physical hard labour of its populations that Westerners think they shouldn’t have to do anymore. At the end of the day stuff only gets done when someone physically does it. You don’t make steel sitting in an office. Or build a supertanker either. There are too many people in the West who don’t DO anything, despite ‘working’ fulltime. We are entering a era when living standards are going to fall consistently in the West for the first time in living memory. No wonder politicians want someone to blame.

  3. miek says:

    I’ll buy stocks again when policy-makers begin to take responsibility for their part in this debacle.

  4. Glen says:

    So Edward where is your rebuttal?

    Krugman, Vlocker, Morici, etc. all seem to be saying the same thing. Excess liquidity underpriced risk.

  5. the question is where did this liquidity come from. I would argue it came from the U.S., Asia and Japan. Greenspan seems to be saying it came from Asia. He tries to absolve himself of all blame here and is not convincing. While Asia played a role, the U.S. also played a role by leaving interest rates too low and having an asymmetric policy response.

    Moreover, his complicity began much earlier — in the 1990s as he allowed a deregulated environment to create macro imbalances. I would also argue that Greenspan’s easy money created the pre-conditions for low savings and high consumption which engendered the whole problem to begin with.

  6. Glen says:

    I find myself in agreement with Dr. Richmond WRT appropriating the blame.

    http://tradeandtaxes.blogspot.com/2009/03/greenspan-protesteth-too-much.html